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Do producers respond to every input price change? A note on nonlinearities in factor demand systems

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  • G�lcan Önel

Abstract

Factor demand relationships, as they are represented by parameters of the cost function, are generally assumed to be linear (in the parameters) in the existing empirical literature. In this note, we argue that this might not always be true, because firms may incur adjustment costs that are inherent in the act of adjusting the mix of inputs applied in the underlying production technologies. We estimate a two-regime threshold system of factor demand equations for several manufacturing industries in the United States. Our results suggest significant nonlinear effects in the factor demand relationships in most nondurable goods sectors. Failure to account for this threshold sensitivity to input price change may cause the estimates of price elasticities to be biased.

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  • G�lcan Önel, 2015. "Do producers respond to every input price change? A note on nonlinearities in factor demand systems," Applied Economics Letters, Taylor & Francis Journals, vol. 22(12), pages 972-977, August.
    • Handle: RePEc:taf:apeclt:v:22:y:2015:i:12:p:972-977
    DOI: 10.1080/13504851.2014.993126
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    Cited by:

    1. Gülcan ÖNEL, 2018. "An implicit model of adjustment costs in differential input demand systems," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(615), S), pages 119-132, Summer.

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